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Suddenly, Stricter Appraisals

IT used to be a market mantra: a house is worth only as much as a buyer is willing to pay. But given today’s bank failures, foreclosures and tightened credit, real estate experts have had to modify the aphorism to reflect harsher realities.

“A house is only worth what the bank says,” said Terry Hastings, a partner at Hamilton Mortgage, in Ridgefield. “It’s not worth what the buyer says anymore.”

Mortgage lenders determined to stave off additional losses are demanding more thorough home appraisals and carefully reviewing valuation figures. If an appraisal is deemed too thin on supporting data, lenders may reduce the loan amount for the property, or not make the loan at all.

And there is little room for arguing with banks about a valuation.

“The banks are much less willing to make any exceptions at all,” said Bob Grace, a broker with Anchor Mortgage, in Westport. “They are looking for ways to squash a deal, as opposed to finding a way to make it work.”

Mr. Hastings recalled one lender who walked away from a deal involving a “really strange contemporary” because the company wasn’t convinced there were any properties that compared with it for valuation purposes.

Lower-than-expected bank appraisals are indeed sending some buyers and sellers back to the bargaining table for another go-round, said Rosamond A. Koether, a lawyer with Cohen & Wolf, in Westport. But in her experience, the tougher appraisal standards are more often an obstacle for homeowners hoping to restructure debt by refinancing.

“I’m seeing people trying to refinance having a very hard time because their houses aren’t appraising out at enough,” Ms. Koether said. “That’s become a huge problem.”

Lower-income buyers aren’t the only ones in over their heads, she said. In pricey Fairfield County, many owners bought their dream homes with 100 percent financing or interest-only loans, often along with equity lines of credit. “Everybody was doing it,” Ms. Koether said.

Now, because of declining values, those houses may be worth less than their owners owe the bank. According to the Warren Group, a provider of real estate data in Boston, the median sale price for a single-family home in Connecticut fell by 8.3 percent during the first nine months of this year, to $275,000. In Fairfield County, the year-to-date median slid 10.4 percent, to $540,150.

Thus, said Mr. Grace, the Westport mortgage broker, when it comes to refinancing, anyone who bought a home in the last three years and put less than 10 percent down “is having a tough time doing anything.”

Appraisers say lenders’ stricter standards are long overdue. But the demands can be onerous in a static market.

Photo

EVALUATION Taylor Beerbower of Mulberry Street Appraisals in Fairfield trains his lens on a property in Greenwich. Lenders now want more data from appraisers.Credit
Janet Durrans for The New York Times

“You have banks that know what’s going on and accept it,” said Chris Downey, managing partner at Redding Appraisal Group, “and you have banks that are a little ridiculous.”

Many lenders are requiring “comps” — sales of comparable properties used to help determine a home’s value — no more than 60 to 90 days old, and within a mile of the property being appraised.

That’s a tall order, given that the pace of sales has slowed substantially. Year-to-date home sales in Connecticut are down almost 25 percent from this time last year. So in addition to searching multiple listing services, appraisers search out comparable sales by talking to real estate agents and scouring town hall records for private sales.

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“In an ideal situation we can get two or three perfect comps,” said Richard P. Piazza, the president of the Premier Appraisal Group, in Norwalk. “In this market, we’re fortunate to get one or two.”

Worse, sometimes the only available comps include a foreclosure or a short sale. Because such properties typically sell below market rates, they can drag down a neighboring house’s perceived value.

Increasingly, in addition to the comps, lenders want appraisers to round out the valuation picture — to provide data that reflects where the market is now, and where it may be headed.

“There is more of an emphasis on active and competing sales,” said Taylor Beerbower, the owner of Mulberry Street Appraisals, in Fairfield. “They are looking at things that are competitively priced. The theory of substitution says that the buyer is going to buy the equal property for the least amount of money.”

Appraisers are also interested in a neighborhood’s “absorption rate,” or how many months it will take, at the current sales pace, to sell that market’s entire housing inventory. Absorption rates of six months or more suggest an oversupply, which results in declining values, Mr. Beerbower said.

Trying to predict future values is a guessing game in this climate, of course. And local appraisers and mortgage brokers complain that mega-banks may be compounding the uncertainties in the process by bringing in out-of-state appraisers, some of them relatively inexperienced, as a way of cutting costs.

Every market has different dynamics, they say, and values can vary from neighborhood to neighborhood, or even street to street. Appraisers unfamiliar with an area miss those nuances. “They’re coming in very very low because they don’t know the market,” Mr. Hastings said.

That’s exactly the opposite of what the banks should be doing right now, said Mr. Piazza, the appraiser.

“It used to be banks would call and the first question they would ask was, ‘How familiar are you with a particular area?’ ” he said. “Now, that conversation starts with, ‘What’s the lowest fee you can offer and what’s your fastest turnaround time?’ ”